Tuesday, February 14, 2012

News Update New BSP policy on reserve requirement seen bad for banks

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) move to terminate interest on reserves is creating negative pressure on credit ratings of Philippine banks, according to Moody’s Investors Service.
Moody’s said banks face a potential decline in their net interest margin, estimated between nine and 38 basis points, as a result of the BSP move.
“We expect the termination of interest payments on reserves to reduce banks’ interest yields and adversely affect their net interest margins and risk-adjusted profits,” Moody’s said, in a report.
The BSP earlier announced changes in the reserve requirement system. It said the reforms were meant to rationalize, and thus make the country’s monetary policy more effective.
However, Moody’s said terminating the interest on reserves may cause banks to lend to borrowers with inferior creditworthiness, thus affecting their risk exposure.
“These additional credit exposures may boost the banks’ loan margins immediately, but they will increase the banks’ risk profiles and eventually hurt their risk-adjusted profits,” the credit rating agency said.
The BSP officials said the reserves must be placed in the BSP to improve monitoring, in response to concerns that some banks were using a portion of the reserves for lending or investments.
The BSP added the three-percentage-point cut in the reserve requirement was meant to offset the impact on banks’ income of the lifting of interest. The cut in the reserve requirement also boosts the available money for investments like lending.
While the lower reserve requirement ratio would free up additional funds for banks to lend or invest, Moody’s pointed out that banks would have to earn at least 15 percent yield on their freed funds to fully compensate for the forgone interest and to maintain current net interest margins.
Currently, Moody’s estimates that Philippine banks are only earning seven percent to 10 percent on their loans that would further decline due to the low interest rate environment.
“As a result, we expect most banks will fail to recoup the forgone interest as a result of the central bank’s measures and will experience a drop in their net interest margins as a result,” Moody’s said.
According to Moody’s, banks with small deposit bases as a percentage of total assets led by the Development Bank of the Philippines with 20 percent would experience the least pressure on their net interest margins.
On the other hand, it said banks with high deposits as a percentage of total assets led by the Philippine National Bank (PNB) with 74 percent, Land Bank of the Philippines with 71 percent, and United Coconut Planters Bank (UCBP) would result to a 34 basis points to 38 basis points reduction in their net interest margins.
Aside from the direct effect on interest income, the rating agency said the changes to the reserve requirement policy would also result in potential second-round effects on credit profiles if banks offset higher margin pressure by accepting more credit risk and relaxing their underwriting standards.
Banks to be affected by the higher credit risks would include Allied Bank, PNB as well as UCPB that have non-performing loan (NPL) ratios exceeding five percent as of end-November last year.
“Of the three, we see Allied Bank as the most vulnerable to any further risk-taking. Its risk-adjusted profitability is the weakest among our rated Philippine bank, “Moody’s said.